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15 Dec 2014
A hawkish FOMC meeting will reinforce USD-positive sentiments – BOML
FXStreet (Barcelona) - The Bank of America-Merill Lynch Team notes that a more hawkish FOMC will reinforce the rate hike possibility, thereby boosting the USD momentum which is seen as slowing down into year-end.
Key Quotes
“We see a very good chance that the FOMC will note continued improvement in labor market conditions while still seeing labor market underutilization as “gradually diminishing.” We also expect Fed officials to trim their unemployment rate forecasts for 2014, 2015 and probably 2016, continuing a trend.”
“Note that they forecast the unemployment rate to be just above their longer-run estimate in 2015 (5.5% vs. 5.3%) and actually below it in 2016. Moreover, the estimate of the longer-run unemployment rate — thought to capture the FOMC’s views on the NAIRU — has been edging lower since mid-2013, as the drop in joblessness has not led to any measurable acceleration of wages or inflation. We see some chance Fed officials could trim it another tenth in December.”
“At the same time, we expect the FOMC to note the recent drop in oil prices, but largely look through them as temporarily reducing inflation — we expect the SEP to show a reduction in headline PCE inflation for this year and next, but little if any change in the core inflation forecasts.”
“Our base case should be USD-positive, as removing “considerable time” is seen as the first step toward eventual rate hikes next year — supporting the policy divergence theme. A more hawkish read of this meeting would just reinforce that view further. However, long USD positioning is already stretched, reaching US$49.1bn in the latest week, which could mitigate some of the USD strength in this case. The USD’s inability to sustain a rally following the very strong November employment report also may suggest slowing USD momentum into the year end.”
Key Quotes
“We see a very good chance that the FOMC will note continued improvement in labor market conditions while still seeing labor market underutilization as “gradually diminishing.” We also expect Fed officials to trim their unemployment rate forecasts for 2014, 2015 and probably 2016, continuing a trend.”
“Note that they forecast the unemployment rate to be just above their longer-run estimate in 2015 (5.5% vs. 5.3%) and actually below it in 2016. Moreover, the estimate of the longer-run unemployment rate — thought to capture the FOMC’s views on the NAIRU — has been edging lower since mid-2013, as the drop in joblessness has not led to any measurable acceleration of wages or inflation. We see some chance Fed officials could trim it another tenth in December.”
“At the same time, we expect the FOMC to note the recent drop in oil prices, but largely look through them as temporarily reducing inflation — we expect the SEP to show a reduction in headline PCE inflation for this year and next, but little if any change in the core inflation forecasts.”
“Our base case should be USD-positive, as removing “considerable time” is seen as the first step toward eventual rate hikes next year — supporting the policy divergence theme. A more hawkish read of this meeting would just reinforce that view further. However, long USD positioning is already stretched, reaching US$49.1bn in the latest week, which could mitigate some of the USD strength in this case. The USD’s inability to sustain a rally following the very strong November employment report also may suggest slowing USD momentum into the year end.”